personal finance secrets: have a plan

Earlier today, I was talking with a colleague of mine about saving for college. Our children are still very young — my older child is five, and his is two — but we both know that college will be here in the blink of an eye, and if costs continue rising as they are, we have no time to lose.

Of course, that’s the catch, isn’t it? “If costs continue rising as they are.” Does anyone really think that college education’s current 7-8% rate of inflation is sustainable? Surely, something has to give soon, right?

Well, maybe. Probably. But maybe not. What, then, do we do? Sit back and hope that things have changed by the time our children are college-bound? Hardly. I’ve seen what happens when a cavalier attitude is taken towards college finances — bright kids go to a prestigious, expensive university, only to discover that the work they’re passionate about can’t support the student loans they’ve had to take. And so begins the debt spiral.

So we can’t do nothing. But we can’t create a plan that relies on things staying as they are, either; setting up an auto-withdrawal into a 529 plan and then ignoring it for the next couple decades is, while marginally better than doing nothing, still sub-optimal. The middle ground is this: make a plan that has some assumptions and some flexibility, and make course corrections as time goes by. It’s fairly certain that you’re going to have a wide margin of error at the beginning, but that’s OK — at least you’re travelling in the right direction. As your target date approaches, and as your information becomes more accurate, you can adjust your plan accordingly.

I know what you’re thinking, being the smart person you are: “Hmm…this probably applies to more than just college, doesn’t it?” That’s very insightful of you!

This concept applies to just about any long-term financial goal; retirement is another great example. You can create a super-complex formula for determining how much you need to save, but change just one or two variables — how much social security you get, how the tax code changes between now and then, how much you average returns are — heck, even whether the bulk of your high-return years are now or close to retirement — and you’ll get completely different answers. All you can do is make some assumptions, use those assumptions to make a plan, execute on that plan, and revisit and re-evaluate periodically. Again, your initial plan will almost certainly be very, very wrong, but that doesn’t make it worthless! Rather, it gives you a decent starting point, which will gradually become closer and closer to reality as time goes by and you make the necessary course corrections.

Sure, it takes some work — but it beats waiting until the last minute.